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Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?Pierre CahucNational Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE); Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA); French National Center for Scientific Research (CNRS); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA) Guy LaroqueNational Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) July 2007 IZA Discussion Paper No. 2955 Abstract: We analyze optimal taxation in an economy with monopsonistic labor markets. The individuals, whose only decisions are whether to work, or not, have heterogeneous productivities and opportunity costs of work. Given its preferences for redistribution, the government, which does not observe the opportunity costs of work, chooses a tax scheme implementing the second best allocation. We compare the optima in the competitive and monopsonistic environments. We find that the government can always implement the second best allocation of the competitive economy in the monopsonistic environment. The optimal tax schedule comprises employment subsidies financed by taxes on profits. In this setup, there is no room for a minimum wage.
Number of Pages in PDF File: 26 Keywords: minimum wage, optimal taxation, monopsony JEL Classification: H31, J30, J42 working papers seriesDate posted: August 17, 2007Suggested CitationContact Information
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